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The Neoclassical Growth Model and Global Poverty

The Neoclassical Growth Model and Global Poverty

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The Neoclassical Growth Model

The Neoclassical Growth Model

David Stone
The first idea we want to explore is whether or not the idea of economic growth is relevant to developing policies that reduce poverty in developing countries. Indeed, the neoclassical growth model does effectively highlight an important correlation between economic growth and poverty reduction. This model theorizes that economic growth is contingent upon the accumulation of capital-both human and physical-and technological progress. Human capital refers to the increase in labor productivity due to levels of education, skills and experience, and the health of people. Physical capital represents the tools used in production. Lastly, technological progress has a two-fold meaning: it is the ability of larger quantities of output to be produced with the same quantities of capital and labor. Equivalently, technological progress represents the key ingredient in developing new, better and a larger variety of products for the public to consume. Studies have shown that "literacy and other indicators of education remain woefully low across much of the developing world," and a policy that helps poor people acquire human capital would result in their earning higher wages (Besley and Burgess, 2003). The neoclassical growth model could be used to argue that a climate that is more conducive to investment and entrepreneurship would help to reduce poverty. This idea follows from the premise that heavy regulation of business ownership is not in the public interest because it results in low capital intensities, low human capital per worker, and low productivity (Bigsten and Levin, 2000).

The implication that the economy is closed, which is used to develop the neoclassical growth model, severely limits our ability to accurately portray real world scenarios related to the plight of the poor. One of the handicaps that it causes is in our inability to consider foreign capital inflows along with domestic investment. Developed countries may find it beneficial to stimulate the economy of a developing nation by investing in research and development (R&D) in that nation, for instance. The encouragement of new technologies may help poor people living in agricultural and rural areas attain higher levels of output per capita and to better maximize their land and resources. The incentive for the developed country could be to establish new trading partners and open up new markets for its own economy. Evidence shows that the opening up of international markets is conducive to economic growth, as seen in the fact that "growth problems have been most pronounced in countries that have pursued an inward-oriented policy" (Bigsten and Levin, 2000). This may be one of the reasons that many African countries have had low levels of output per capita, low growth rates, and decreases in standard of living over time. Other possible reasons for the economic stagnation in African countries will also be explored to reflect issues of poverty.

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